The Monetary Policy Committee (MPC) will hold its next meeting on June 9, the Central Bank of Kenya (CBK) said in a brief statement, sparking a rate hike buzz. The bank, which held its latest policy meeting on May 6, usually meets on rates once every two months, so the next meeting was expected at the beginning of July.
CBK did not provide details why it is bringing forward the MPC meeting, but we believe it is pursuing prompt measures amid weakening local currency and accelerating inflation. The shilling has weakened more than 3% against the US dollar since the latest MPC meeting, exceeding another psychological level of 98. The depreciation since the beginning of the year has reached nearly 8%.
The headline annual inflation quickened to an eight-month high of 7.08% in April due to a continuing drought-driven food price growth. At the beginning of May, the MPC noted there were no demand driven threats to inflation, but warned that the weakening of the shilling is triggering inflationary expectations, threatening the central bank’s price stability objective. It observed that the local currency was pressured by the global strength of the dollar and an enhanced, but seasonal, demand for hard currency by local companies associated with dividend and profit remittances.
The CBK hoped to anchor inflation expectations by using its monetary policy tools on the money market. However, its market interventions are likely to have reduced its foreign exchange reserves. The central bank’s usable forex reserves stood at $6.86bn at end-April, equivalent to 4.4 months of import cover, down from $7.22bn, or 4.65 months of import cover, at end-February.
In February, the International Monetary Fund (IMF) approved a total of $688.3mn worth of loans for Kenya under two one-year arrangements and the country said it will treat the arrangements as precautionary, drawing funds only in case of external shocks that lead to an actual balance-of-payment need.
Inflation data for May is due to be released on May 29. Inflation has remained within the government's medium-term target of 5% plus/minus 2.5pp for eight consecutive months after a temporary breach last summer.
Kenya’s Central Bank Rate (CBR) has remained at 8.5% since May 2013.
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